Amazon’s Secret

Retailers face two choices, Amazon founder and Chief Executive Jeffrey Bezos said in a conference call earlier this year: Work hard to raise prices or to lower them. Amazon, he says, has “decided to relentlessly follow the second model.”

Amazon’s surprising formula is exactly what helped ruin many other online businesses and once added to the gush of red ink at Amazon itself: aggressive discounting and free shipping. To pay for those goodies, Amazon is behaving like every other successful mass retailer and slashing its costs wherever it can. A smarter system of processing orders means fewer errors. It has cooked up imaginative ways to cut shipping fees by consolidating orders. And it has a lucrative new business selling new and used goods online on behalf of other merchants. Amazon collects commissions on those third-party sales without the risks and costs of owning the inventory.

Discount retailers such as Wal-Mart Stores Inc. continually lower prices by squeezing inefficiencies from their operations, sacrificing fat profit margins on products in favor of selling in high volumes. By adopting this strategy, Amazon appears finally to be doing what industry officials have long said the Internet would allow retailers to do — drive down prices aggressively for consumers.